Tuesday, September 28, 2010

This first appeared in IKN73 last Sunday, September 26th and is a report of the meeting this humble scribe had with the CEO of FVI last Friday, September 24th at FVI HQ. Reproduced here for your viewing pleasure, the only thing missing is this author's concluding remarks. Enjoy.

A meeting with Jorge Ganoza, CEO of FVI

On Friday morning I sat down with Jorge Ganoza, CEO of Fortuna Silver, so here are the main points we talked about.

Denver: Ganoza had just returned from the annual Denver Gold Show and so that got some airtime first. He said it had gone very well for FVI and gave a few instances, with the main takeaway for author being that in this third time for FVI at the show it was also the first time FVI didn’t have to go out and look for meetings, contacts, etc. This time the mountain came to Mohammed and FVI had its agenda filled by people wanting to talk to him.

Ganoza also commented on happy holders he met up with at the show by saying, “It was rewarding to see people with whom we’ve been in contact with for the last months who made the leap of faith and bought the stock....it was rewarding to see guys who have been making money with the stock because Fortuna hasn’t just been moving with the pack; it’s been outperforming the pack.”

There seems to have been a sea change in the investor profile at FVI in recent months. When talking about a particular institution in Europe that finally made the decision to buy recently and has been making very good money on the trade since then, Ganzoa said; “Especially in Europe it’s about building a relationship with European funds and this is a conference where a lot of the Europeans come. London institutions, Swiss institutions. And those guys are different from North American investors. It takes more time with them but when they go in....they’re more stable shareholders.” On this subject, when asked for a best guesstimate of the percentage of shares held by institutions and tight insider hands, the answer came back “60% instos and insiders, 40% retail”.

Next subject was the possible listing of FVI in the USA. Ganoza said that the company is looking into the option and doing a legal review of requirements. Apart from not being Sarb-Ox compliant (not that difficult to fix, a case of hiring the right competency), Ganoza sees no big direct block to listing in the USA. It’s up to the board to make the decision to move forward (or not) on this matter, but if the decision is positive it wouldn’t take a lot of time to implement the policy. In the event of a US listing, FVI would expect volumes to rise and more shares to move to the retail holding sector, as today (in the CEO’s opinion) FVI doesn’t have a big retail following. Right now Ganoza said he is very happy the way the share has been operating, with plenty of momentum.

Exploration and M&A. I asked Ganoza about M&A and pointed out that in every quarterly conference call he’s said that M&A is a possibility for the company and that they’re looking around for the next deal. To this he replied, “When I think about M&A I think more about corporate transactions” and downplayed M&A as a main thrust of FVI. For sure if the right opportunity came along they’d jump at it but it’s not the top priority right now, according to the CEO (and that’s not a bad source, really). He then talked about the exciting opportunities he and the company sees in exploration potential at its San José property and it quickly became clear that FVI was planning to move aggressively on its large land package in the area around the current project under construction at San José. In particular, two areas that have not been explored in detail and are exciting the company sit to the East of the San José mine under construction and are called “Taviche” and “El Rancho”. Ganoza (and by inference FVI) is clearly excited about these prospects along with others on the San José concession and I’m sure we’re going to hear a lot more about them in 2011, as I was told (without getting to hear an exact figure) that the FVI exploration budget will be substantially higher in 2011 than this year’s $5.5m for San José and Caylloma combined. Exploration of San José’s newer targets will run alongside exploration at the San José ‘Trinidad’ area that’s going into production and also at Caylloma, where replacing and adding to reserves are the touchstones. At Caylloma, I was told that the exploration efforts will centre on the main producing areas (Animas, Bateas, the San Cristobal offshoots such as Soldedad, Silvia etc).

The talk of new exploration programs took up a surprising amount of our interview time, in fact. With Caylloma operating smoothly and the San José construction going according to plan, it was clear that FVI isn’t resting on its laurels and now has its next project (wherever it turns out to be) as a high priority. Here’s a transcripted section of the interview to give an idea of how keen Ganoza was on this subject:

Ganoza: “We have new directors so .....we are already reviewing our strategies with our directors. I can tell you that our position is to capitalize on what we have. That will be the cheapest way to add share value. We are very excited about the potential of what we own and so you’ll see our (exploration) budgets ramping up. Why do I talk about that now if we already had it? When we started in 2007 we had 17,000 sites to cover in San José. As 2008 progressed we continued with the work and then the second half of 2008 was the end of the world so we cut all the programs like everybody else did. And then as 2009 recovered, the recovery was fast and so we said “ok, let’s get the geologists out in the field again” and then (at that moment) we were blockaded at San José. So we pulled back the geols, because we didn’t want any sort of incident to affect our ability to build the mine. So we circled the wagons, focussed on San José permitting, engineering and construction. So now that the construction is launched and underway...

(Your author interrupts) “...and the social side is acceptable...”

Ganoza, “..And the social side is acceptable. I’m not saying there are no risks because there are minor risks, but I believe we can take those risks now. In fact the (local) government is now saying to us “is there more investment coming? More than you’re building now? Please, spend your money! Go ahead, we need the employment!” So we have two crews exploring as we speak at Taviche and El Rancho and we have lots of work ahead of us.”

As for M&A, the possibilities are still there. If the company can do something “from treasury” to add exploration value (by ‘from treasury’ Ganoza said he meant perhaps an optioning in agreement or a JV on the property) with the main target countries Peru and/or Mexico. Second ranked areas would be southern Argentina and the North of Chile and then after that the project would have to be “a compelling opportunity” to get FVI into a different jurisdiction than those. The impression got by your author was that FVI will in all likelihood remain a Peru/Mexico company into the indefinite future, no matter how many new projects it picks up along the way. However Ganoza also gave some size guidance to any third party deal and said that a transaction that “changes the share structure in a material way is not a priority for us”. In other words, FVI isn’t looking for a bigger merger or fusion deal with peers.

For what it’s worth, when the other side of the coin was presented and Ganoza was asked whether he’d taken calls from companies interested in buying FVI, the answer was a categoric “no” and that FVI had had no merger conversations at all up to now.

San Jose construction news. Ganoza said that, “Construction has been launched and advancing well. We are on budget and on schedule...with no critical path delays”. So when asked when we can expect production at San José to begin the good surprises started to flow.

Your author: “When do you expect commissioning, when do you expect production day one?” Ganoza: “August of 2011.” YA: “August?” Ganoza: “Yes. That’s the date I have in my planner and it’s not moving. If it moves I will inform accordingly.”YA: “Ok, so are we talking about (initial production at) the pre-feas number of 750tpd or are we talking about 1000tpd?”

Ganoza: “1000 tonnes per day. We have approved a revised mine plan to start production at 1000tpd.”

So now you know. I then asked Ganoza about the ramp-up time to get to that 1000tpd throughput level and suggested that we’d expect a gradual ramp to that 1000tpd number by the end of 2011. This was immediately thrown back in my face. “Within three or four weeks” is how long Ganoza expects 1000tpd to be achieved on a steady state basis. In other words, the fourth quarter of 2011 will be a fully commercial production quarter.

The “go to 1000tpd” plan is simple because the mine plant is simpler, even simpler than Caylloma because there are just two lines of product (gold and silver) to produce doré bars (not greybar) instead of Caylloma’s three products (Zn conc, Pb conc, Cu conc). So the main issue in ramping to 1000tpd will be to get above ground stocks to cover one month’s supply before August. This, according to the company, is the lead item on critical path to starting production on time. The ramp is progressing right now at between 3m and 4m per day and the plan is to stockpile before August to allow sustained feed from day one. On the subject of critical path, the company reported that the ball mill is now on site and ready for installation.

As for ramping forward, it was tougher for him to give the timing for incremental stages between the initial 1000tpd throughput and the full capacity 1500tpd down the line, but Ganoza was confident on reaching full, 1500tpd capacity “within 24 months” of commissioning, which means by the third quarter of 2013. That, from the head of a company that always hit its target timelines at Caylloma, was a bullish statement, stronger than the mine plan put forward by the PFS and stronger than even the more optimistic scenarios from brokerages covering FVI. Quite frankly, when it comes to track record only a fool takes ‘the houses’ over Ganoza on this score. The social side of San José came up on more than one occasion but there’s nothing bad to report. Ganoza said that without being absolutely perfect the social relationships between locals and the company were in good stead (frankly, “good not perfect” is about optimum for a junior building a mine and if I hear “it’s wonderful fantastic couldn’t be better” in the same circumstances it’s infinitely more suspicious). Ganoza then went on to say that the “grey water” treatment plant is now 100% finished and the decision to move on that part of the project first was socially related as it has provided a lot of goodwill from locals towards what the company is doing. On this score, there are a new set of photos taken of latest developments at FVI Caylloma and they should be available next week on the FVI website, according to IR.